Cafeteria plan (FSA) - separate checking account

[Spencer]

I am a 401k TPA.  I have a client asking about setting up a cafeteria plan for medical expense and dependent care reimbursement.  Do the employee contributions have to be in a segregated account and payments made from it?

thanks!

[PAiPal]

Under ERISA Employee Contributions to a cafeteria plan are plan assets just like 401k deferrals.  As plan assets these deferrals need to be held in a Trust.  However the DOL has issued a nonenforcement policy of the Trust Requirement in Technical Release 92-01.  To take advantage of this nonenforcement policy the employee cafeteria plan contributions should remain in the general assets of the employer.  To set them apart in a separate checking account creates the impression of creating a separate fund to pay plan benefits and would lose the nonenforcement exception and require setting up a trust. 

As a side note, creating a cafeteria plan is more than just a checking account to pay benefits.  You need a plan document and the plan must meet nondiscrimination requirements.  In many ways it is  just like a 401k except you paying health and dependent care claims.  Another wrinkle is that these plans are subject to HIPPA, COBRA and the Affordable Care Act.

 

[QDROphile]

Excellent response, not less true just because almost no one truly complies with the DOL non-enforcement policy.  I have not heard of the DOL taking action.